Portfolio Asset Allocation by Age — Beginners to Retirees

In a hurry? Here are the highlights:

  • Asset allocation refers to how different asset classes are proportioned in an investment portfolio, and is determined by one’s investing objectives, time horizon, and risk tolerance.
  • Asset allocation is extremely important, more so than security selection, and explains most of a portfolio’s returns and volatility.
  • Stocks tend to be riskier than bonds. Holding two uncorrelated assets like stocks and bonds together reduces overall portfolio volatility and risk compared to holding either asset in isolation.
  • There are a few simple formulas to calculate asset allocation by age, suitable for young beginners all the way to retirees, and appropriate for multiple risk tolerance levels.
  • M1 Finance makes it extremely easy to set, maintain, and rebalance a target asset allocation.

What is Asset Allocation?

Asset allocation simply refers to the specific allotment of different asset types in one’s investment portfolio based on personal risk tolerance, goals, and time horizon. The three main classes are stocks/equities, fixed income, and cash or cash equivalents. Outside of those, in the context of portfolio diversification, people usually consider gold/metals and REITs to be their own classes too.

Why is Asset Allocation Important?

These different asset classes behave differently during different market environments. The relationship between two asset classes is called asset correlation. For example, stocks and bonds are held alongside one another because they are usually negatively correlated, meaning when stocks go down, bonds tend to go up, and vice versa. That uncorrelation between assets offers a diversification benefit that helps lower overall portfolio volatility and risk. This concept becomes increasingly important for those with a low tolerance for risk and/or for those nearing, at, or in retirement.

Stocks are represented by the Standard & Poor’s 90 Index from 1926 to March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 through April 22, 2005; and the MSCI US Broad Market Index thereafter. Bonds are represented by the S&P High Grade Corporate Index from 1926 through 1968; the Citigroup High Grade Index from 1969 through 1972; the Bloomberg Barclays U.S. Long Credit AA Index from 1973 through 1975; and the Bloomberg Barclays U.S. Aggregate Bond Index thereafter. Data are through December 31, 2019. Source: Vanguard calculations, using data from Morningstar, Inc.

Asset Allocation and Risk Tolerance

Remember, one of the major factors in determining one’s asset allocation is personal risk tolerance. Stocks are more risky than bonds. Buying stocks is a bet on the future earnings of companies. Bonds are a contractual obligation for a set payment to the bond holder. Because future corporate earnings — and what the company does with those earnings — are outside the control of the investor, stocks inherently possess greater risk — and thus greater potential reward — than bonds.

  • Sold: low risk tolerance
  • Held steady: moderate risk tolerance
  • Bought more: high risk tolerance
  • Bought more and hoped for further declines: very high risk tolerance

Asset Allocation Questionnaire

Vanguard has a neat asset allocation questionnaire tool that can be used as a starting point. The questionnaire incorporates time horizon and risk tolerance. You can check it out here. While it may be a useful exercise, it’s still only one piece of the puzzle and doesn’t factor in things like current mood, current market sentiment, external influence etc. Be mindful of these things and try to be as objective as possible.

Asset Allocation by Age Calculation

There are several quick, oft-cited calculations used for dynamic asset allocation of a portfolio of stocks and bonds by age, moving more into bonds as time passes. For the sake of clarity and consistency of discussion, we’re going to assume a retirement age of 60.

  1. The first and simplest adage is “age in bonds.” A 40-year-old would have 40% in bonds. This may be fitting for an investor with a low tolerance for risk, but is far too conservative in my opinion. In fact, this conventional wisdom that has been repeated ad nauseam goes against the recommended allocations of all the top target date fund managers. This calculation would mean a beginner investor at 20 years old would already have 20% bonds right out of the gate. This would very likely stifle early growth when accumulation is more important at the beginning of the investing horizon.
  2. Another general rule of thumb is a more aggressive [age minus 20] for bond allocation. This calculation is much more in line with expert recommendations. This means the 40-year-old has 20% in bonds and the young investor has a portfolio of 100% stocks and no bonds at age 20. This also yields the stalwart 60/40 portfolio for a retiree at age 60.
  3. A more optimal, albeit slightly more complex formula may be something like [(age-40)*2]. This means bonds don’t show up in the portfolio until age 40, allowing for maximum growth while early accumulation is more important, then accelerating the shift to prioritizing capital preservation nearing retirement age. This calculation seems to most closely follow the glide paths of the top target date funds.

Asset Allocation by Age Chart

I’ve illustrated the 3 formulas above in the chart below:

Asset Allocation Examples

Let’s look at some examples of asset allocations by age.

Asset Allocation in Retirement

Growth becomes less important near, at, and in retirement in favor of capital preservation. This means minimizing portfolio volatility and risk, such as with the All Weather Portfolio. This is why diversifiers like bonds become more necessary at the end of one’s investing horizon, providing stability and downside protection.

The Best Books on Asset Allocation

Interested in reading some books on asset allocation? Some of the best names in the business — Roger Gibson, William Bernstein, and Rick Ferri — have written some:


Asset allocation is an extremely important foundation for one’s investment portfolio. It is dependent on the investor’s time horizon, goals, and risk tolerance. There are several simple formulas that can be used in helping determine asset allocation by age. Take the time to assess all these factors for yourself. For a hands-off approach, you may be interested in a lazy portfolio or a target date fund.


* Vanguard, The Global Case for Strategic Asset Allocation (Wallick et al., 2012).



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John Tyler Williamson

John Tyler Williamson

Analytical and entrepreneurial-minded data nerd, usability enthusiast, Boglehead, and Oxford comma advocate. https://www.OptimizedPortfolio.com